Muhammad Ayub1, Camille Silla Paldi2

(1. Riphah Centre of Islamic Business (RCIB), Riphah International University Islamabad;

2. Franco-American Alliance for Islamic Finance (FAAIF) Ltd. Dubai, UAE)

 

 

Abstract: Islamic banking has crossed the milestone of forty years since the Dubai Islamic Bank and the Islamic Development Bank were established in 1975. Islamic banking windows, standalone Islamic banking systems and even full-fledged Islamic banks, may be termed as IBIs as a whole, are operating as a part of global finance industry in the scenario wherein interest based institutions capture the overwhelming part of the business. They use Islamic equivalents of almost all conventional finance products for financing and liquidity and risk management devices, from “over draft” to the most toxic derivatives like swaps to compete with the conventional banks in profitability. The tense dichotomy between Shari’ah compliance and the economic goals of an IBI produces a proliferation of reverse engineered products, which are barely in compliance with Islamic law. As a commercial necessity and the need to compete for profitability, many Islamic finance professionals, academics and some Shariah scholars advocate for the use of such products and devices, despite severe criticism with regard to their non-Shari’ah compliance, treating it “hajah” for risk hedging on the basis of “maslaha” or “umum balwa”. The path dependency syndrome may lead to credibility loss to Islamic finance resulting in persistent financial exclusion of the faith based clients/investors. This paper discusses the severity of the dichotomy and suggests some policy initiatives and steps to lessen it and make Islamic banking and finance an increasingly sustainable global discipline based on sound principles. It recommends that the Shariah fraternity and Islamic finance professionals should explore the Shari’ah rules and real business potentials to find the answers to the current Islamic banking conundrum and lead the industry on the right path of developing Shari’ah based products and using Shari’ah devices to hedge risk.

 

 

Key words: Islamic finance; shari’ah compliance; financial derivatives; maqasid al shariah; Islamic swaps;

financial stability; structured products; maslaha

 

JEL codes: E44, E52, E58, G15, G21, G28